Friday, October 28, 2011

Obama's Loan Lie

In case you hadn't heard, Barack Obama has saved the college experience for millions of Americans.  Or something like that.  The New York Times provides the lapdog version:
President Obama will announce new programs Wednesday to lower monthly loan payments for some students graduating next year and thereafter and to let borrowers who have a mix of direct federal loans and loans under the old Federal Family Education Loan Program consolidate them at a slightly lower interest rate.

... the president would use his executive authority to expand the existing income-based repayment program with a “Pay as You Earn” option that would allow graduates to pay 10 percent of their discretionary income for 20 years and have the rest of their federal student loan debt forgiven. That plan would start next year. 
Seems pretty heroic, doesn't it?  As with everything from liberals, though, it's not exactly what it seems:
His most recent politically calculated gambit is to win back the youth vote by issuing an executive order that mandates “student loan relief.” That the proposal happens to cater to one of the anti-Wall Street protesters’ demands is purely coincidental.

In actuality, the plan is nothing new. The order merely fast-tracks an income-based student loan repayment program passed by Congress last year.

Here is how Obama introduced the plan to an audience of students at the University of Colorado this week:
When a big chunk of every paycheck goes toward student loans instead of being spent on other things, that’s not just tough for middle class families; it’s painful for the economy and it’s harmful to our recovery.
Sounds good. So how does the plan work? Basically, it envisions two fundamental changes to federally backed student loans. Neither of the changes will apply to private student loans that are not government-guaranteed.

The first change ... mainly affects loan holders who have already left school. ...

What do the savings translate to? Suppose hypothetically, that a qualifying borrower has $25,000 in student loan debt to be paid back over 120 months at an interest rate of 6.8%. Currently, that individual’s monthly payment is $287.70. Once the quarter percent is subtracted from the rate, which becomes 6.55%, the monthly payment shrinks to $284.50. The savings works out to $3.20 a month. Multiplied times the 6 million students estimated to qualify for loan consolidation and extrapolated over a year, those will savings return just over $23 million to the economy annually—not quite enough to rescue the recovery or register as even a dimple in the nation’s towering debt.
The second change is irrelevant because no one's ever heard of it.  Here's another take on the first 'big' change:
So how much will this consolidation save former students?  Two Starbucks lattes at best (via Instapundit):
 How much would an interest rate reduction of up to 0.5% affect payments?
For the average borrower, the impact would be small. In 2011, Bachelor’s degree recipients graduating with debt had an average balance of $27,204, according to an analysis done, based on Department of Education data. That average has ballooned from just $17,646 over the past decade.
Using these values as the high and low bounds of average student debt over the last ten years, the monthly savings for the average student loan borrower would be between $4.50 and $7.75 per month. Clearly, this isn’t going to save the economy. While borrowers with bigger balances would save more, this is the average. And even someone with $100,000 in loans would only cut their monthly payments by $28.50.
Obama’s biggest change will, on average, put $8 in the pockets of student-loan debtors.  In contrast, Obama’s Making Work Pay tax cut added about $8 per week to the paychecks of all workers in the US for more than two and a half years.  Did this lead to an economic renaissance?  Not exactly.
And here's the long-term danger:
The biggest problem we face in student loans is their escalating cost to US taxpayers and borrowers alike, especially now that Obama and the Democrats in the previous Congress nationalized the industry.  But the loan program itself has created that escalation by artificially producing demand that pushes prices up for tuition, which then increases the amounts needed for loans.  It’s a bubble with some similarities to the housing markets prior to 2008, where government intervention for a presumed social good (every child should go to college/every family should own a home) transforms into massive market distortion and unsupportable credit burdens relative to value.

We should focus ... on finding ways to move away from this unsustainable model rather than put taxpayers even more at risk for the credit crisis that will shortly arrive on our doorsteps.
It's yet another short-term fraud that will inevitably result in a long-term crisis.  Unfortunately for America, Obama's track record on stuff like that is abysmal.  Take, for example, the whole notion of his big stimulus to get the economy going.  It's a lie, they knew it was a lie, and now even Obama's people are admitting it.  This whole video clip is interesting, but the money part is the first half minute:


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